Monks Inv Regulatory News (MNKS)

RNS Announcement

The Monks Investment Trust PLC (MNKS)

Legal Entity Identifier: 213800MRI1JTUKG5AF64

Results for the year to 30 April 2023

Source: Refinitiv / Baillie Gifford. All figures are total return*. See disclaimer at the end of this announcement.

* Alternative Performance Measure - see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

† Benchmark: FTSE World Index (in sterling terms)

The following is the Preliminary Results Announcement for the year to 30 April 2023 which was approved by the Board on 19 June 2023.

Chairman's Statement

Performance

During the year the NAV total return, with borrowings calculated at fair value, was -1.6%. The share price total return was -7.0%, while the FTSE World Index returned +3.2%. This is a disappointing outcome against the backdrop of last year's declines. It is now eight years since the change in investment approach was implemented in March 2015. Since the end of March 2015, the NAV total return has been +126.7%* against the comparative index at +127.4%*. Over the same period, the share price total return was +131.3%*. Recent underperformance by growth stocks has wiped out the cumulative gains of the prior years. We are very mindful of the need to return to outperformance, in a variety of market conditions.

Share Capital

In what has been a difficult year from a performance perspective, we were pleased to issue new shares to former shareholders of The Independent Investment Trust PLC ('IIT'). The Company issued 16.7 million new ordinary shares in return for £173.1 million of IIT's assets, comprising £72.3 million cash and £100.8 million in equity investments, in accordance with the prospectus and circular published on 6 October 2022. This should be seen as an endorsement of Monks' credentials as a long-term growth vehicle for savers. Benefits to shareholders include increased scale, an estimated reduction to the ongoing charges ratio of two basis points, and cash to invest at an advantageous point in the performance cycle. The Board is delighted to welcome these new shareholders to the Company.

The Board does not have a formal discount control mechanism, however, against a backdrop of widening discounts across the investment trust sector, the Board has been active in buying shares in the open market. Having issued shares when Monks was at a premium, we feel it is our obligation to be ready buyers at a discount, not least because we believe that the market is underestimating the value in our portfolio. Buying in the Company's own shares at a discount to NAV enhances NAV per share for ongoing shareholders (approximately +0.48% in the year to end April 2023). With the shares trading at a consistent discount throughout the year, the Company bought back 13.6 million shares, costing £135.2 million. The discount to NAV with borrowings calculated at fair value was 9.7% as at 30 April 2023, compared to a discount of 4.4% at 30 April 2022.

Borrowings and Gearing

Our Investment Trust structure allows gearing, which should enhance long-term returns. The Board's strategic borrowing target is 10%. It is expected that gearing will be maintained in the range of minus 15% to plus 15%. Gearing was 7.3% at the start of the year and remained moderate throughout, ending the period at 5.3%. Our long-standing debenture matured in March 2023, leaving the Company with borrowings in the form of a revolving credit facility which was 50% drawn at 30 April 2023, and long-term debt issued to insurance companies at very attractive rates (1.8%) in 2020. The weighted average rate of interest is currently 3.4% (2022 - 2.8%), well below the current market rate.

Unlisted Exposure

We currently take comfort from the low exposure of Monks to unquoted companies, which represent 3.9% of total assets: 2.0% by way of The Schiehallion Fund, a publicly traded investment company; and 1.9% through direct investment (2022 - 6.6% combined exposure: 4.4% The Schiehallion Fund; 2.2% direct investment). These are often the fastest-growth companies, but they also have high financing needs, and that represents a risk in today's environment of tightening liquidity and competition for funds. Schiehallion's shares currently trade at a material discount to net asset value, which offers the potential for re-rating should sentiment towards growth capital improve. The Board has tested the valuations of the small number of investments we hold directly. We believe that they are realistic and that none is material to the Company. In the long run, the Manager and the Board believe that unquoted companies offer us the means to gain exposure to some of the best companies driving economic change.

Management Expenses

Monks remains competitive on fees and expenses, which helps to enhance returns to shareholders. The total ongoing charges ratio for the year to 30 April 2023 was 0.43%, up slightly from 0.40% in the prior year. The current tiered management fee scale should ensure that all shareholders will benefit from economies of scale as asset growth recovers.

Earnings and Dividend

Monks invests with the aim of maximising capital growth rather than income. All costs are charged to the Revenue Account. The Board's policy is to pay the minimum dividend required to maintain investment trust status. Retained earnings are reinvested in the portfolio. In order to build in headroom for further buybacks that may reduce the shares in issue qualifying for dividends, the Board is recommending that a single final dividend of 3.15p be paid, compared to 2.35p last year, to ensure that the amount retained for the year does not exceed that permissible.

Governance and Sustainability

The Company's Manager's investment approach - long-term, bottom-up stock picking and research - marries well with a thoughtful approach to Environmental, Social and Governance (ESG) considerations. Understanding the complexities that individual businesses face is critical as the Manager seeks to assess the impact of ESG factors on the sustainability of investee companies. A dedicated Governance and Sustainability analyst supports the portfolio managers in their engagement with investee companies, and undertakes a range of thematic portfolio analyses which helps to inform and direct engagement priorities. Areas of past focus have included climate change, tax and executive compensation. More can be found about these assessments, and the Manager's broader approach, within the Monks Stewardship Report on the Company's page of the Manager's website

The Board

Following the retirement from the Board of James Ferguson and Edward Harley, the Directors reviewed the skills, experience, and balance of tenure lengths of the remaining Board members; considered recent and anticipated developments in the commercial and regulatory landscape; and appointed Odgers Berndtson to commence the search for a new Director. The Board is delighted to welcome Dr Dina Chaya, who was appointed a Director with effect from 30 November 2022. She brings her experience as a venture capital investor, with particular expertise in life sciences and unquoted investment.

The Board is cognisant of the need to ensure regular refreshment of its composition. Having seen the departure of a number of very long-serving Directors over the last few years, the Board considers that there is an equal need to manage succession so as to ensure adequate handover periods and retention of the corporate memory. Jeremy Tigue, who joined the Board in September 2014, will offer himself for re-election at the forthcoming Annual General Meeting, his ninth since appointment, but he will not offer himself for re-election at the 2024 AGM. Given this impending retirement, and other Directors' plans, the Board has asked that I should stay in post in order to make sufficient hirings to provide a successor who could be in post for longer than a couple of years. The Board's intention is to add one further Director before Jeremy steps down next year, and another shortly after that.

Outlook

The Board's most important role is to challenge the managers on your behalf, to justify why their chosen portfolio should deliver superior returns over the long term. We remain impressed by the breadth and depth of their research, and their willingness to look across geographies and sectors to find underappreciated growth, without a dogmatic approach of narrowing the opportunities to only the fastest growth companies in relatively new parts of economies.

The Board has challenged the managers with respect to recent underperformance, which the managers write about in their report below The last two years have reminded the managers of the importance of valuation discipline. The aggressive period of monetary tightening has most certainly not reined in the pace of underlying change in economies, as the latest developments in artificial intelligence demonstrate. The managers remain focused on capturing this change, and finding the winners as the economic landscape shifts, even when overall growth is feeble. We believe that our managers have constructed a portfolio with very good long-term prospects, thoughtful diversification, and with only a relatively small premium price for much faster growth than the rest of the market will deliver. The Board shares Baillie Gifford's optimism that investors will, in due course, return to attractive growth companies with sustainable business models.

Annual General Meeting

The Company's AGM will take place on Thursday 7 September 2023 at the Institute of Directors, Pall Mall, London, SW1Y 5ED. In order to streamline the ordinary business of the meeting and improve shareholders' experience and representation, the Board intends to hold the AGM voting on a poll, rather than on a show of hands as has been customary, so encourages all shareholders to exercise their votes at the AGM by completing and submitting a form of proxy. We recommend that shareholders monitor the Company's website at monksinvestmenttrust.co.uk where any updates regarding the meeting will be posted. Market announcements will also be made in the event of any change to the scheduled arrangements.

Should shareholders have questions for the Board or the Managers, or any queries as to how to vote, they are welcome as always to submit them by email to trustenquiries@bailliegifford.com or call 0800 917 2112.

KS Sternberg

Chairman

19 June 2023

Past performance is not a guide to future performance. Total return information is sourced from Baillie Gifford/ Refinitiv. See disclaimer at the end of this announcement. For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Managers' Report

An environment for growth

In a world where inflation and interest rates are markedly higher than in the preceding decade and the operating environment is more challenging for companies, many investors equate growth with fragility. We do not share this perspective. In contrast, we believe that the imposition of greater discipline by the market may be very helpful in separating those companies with profitable long-term business models from those which were simply the beneficiaries of a benign funding environment. This underpins our confidence in the ability of Monks' portfolio to deliver attractive long-term returns from here. The portfolio has significantly stronger aggregate balance sheets than the broader market (net debt-to-equity of 20% for the portfolio versus 50% for the FTSE World) and typically invests more in pursuit of growth (for example, the ratio of capital expenditure plus R&D to sales is 11.5% versus 9.0% for the index). This will enable our holdings to outcompete their peers over time and entrench their competitive positions.

Performance has been disappointing, and we recognise that we have made mistakes. We have taken decisive action in repositioning the portfolio and are excited by what we perceive to be a growing opportunity set. Sustainable wealth generation is a function of the underlying performance of businesses from an operational standpoint and the compounding of cashflows over long periods of time. In this regard, the Monks portfolio is in good shape - on a 3-year forward basis the portfolio's earnings are forecast to grow at more than twice the market rate. We stand confidently behind the portfolio and our investee companies' potential to drive positive returns for investors over the long term.

Performance

The current team has managed The Monks Investment Trust for eight years. Over this period, the fair value NAV total return has been +126.7%* (share price +131.3%*) compared to the comparative index (FTSE World) which returned +127.4%*. The year to April 2023 has been challenging. The fair value NAV total return was -1.6% (share price -7.0%) against the comparative index total return of +3.2%.

Following very strong performance throughout the pandemic, as many online businesses performed well, a combination of rising inflation and interest rates and the potential for weaker demand has undermined investor confidence in earlier-stage, high-growth companies. This precipitated a sharp contraction in valuations that was most acute within the 'Rapid' growth portion of the Monks portfolio. The overhang on high-growth stocks is reflected in the holdings that have detracted most from Monks' performance. The largest is The Schiehallion Fund, a closed-ended investment company managed by Baillie Gifford that invests in late-stage private companies. This makes up approximately half of Monks' modest private company exposure (3.9% of total assets). The underlying operational progress of the companies in Schiehallion's portfolio continues to be strong - average revenue growth was over +50% in 2022 - and we remain confident about its long-term potential. Elsewhere, the share prices for similarly high-growth holdings like Farfetch (online luxury goods), Cloudflare (internet performance and security) and Datadog (cloud-based systems monitoring) have all detracted.

In a vast majority of cases, we are confident that recent share price weakness does not reflect underlying progress being made by the companies we own in Monks. However, where our conviction weakened, we have been forthright in moving on. This has been the case where:

i. Operational execution has been poor, for example, at Peloton the home fitness business, and Twilio which operates a communications software platform;

ii. A tougher operating environment challenged our investee companies' growth prospects, as it did for Carvana, the US-based used car retailer;

iii. A prevailing regulatory regime looked likely to negatively impact future returns, as occurred in China. We sold three holdings in the period, Tencent Music Entertainment (social media and music), KE Holdings (real estate), and Brilliance China Automotive (auto retail). The direct Chinese exposure in Monks is a modest 3.6%.

There have been companies in the portfolio for which strong operational performance has been rewarded in share price terms. Highlights include AJ Gallagher, the US insurance brokerage which has been successfully raising prices and buying competitors, Alnylam Pharmaceutical, a leader in gene silencing treatment that has been taking positive steps in broadening the application of its main treatment and MercadoLibre, the South American ecommerce platform that continues to grow its micro-financing and payments ecosystem.

Positioning and optimism

The portfolio, as characterised by Monks' three growth profiles (Stalwart, Rapid and Cyclical), has shifted materially over the past twelve months. The sharp fall in the share prices of 'Rapid' stocks and decisive moves on our part to sell holdings where operational progress has been underwhelming, has resulted in the proportion of the portfolio invested in these types of companies falling by 10 percentage points (from 40 per cent at the end of April 2022). Elsewhere, the portfolio's 'Stalwart' growth companies, with their steadier and more certain growth profile, have performed their balancing role in the portfolio well through this difficult period.

The opportunity set is broadening and the potential for insight growing. The breadth of Monk's approach leaves us well-placed to capture this. Our latest Research Agenda outlines areas of particular interest. We have been active in adding valuable long-term growth exposure to the portfolio.

- Increased Return from Patience - during periods of fear and uncertainty, time horizons shrink and investors focus on the here and now. As long-term investors, this provides us with a heightened advantage in two areas. Firstly, in identifying secular growth companies that are facing near-term headwinds that are obscuring the potential for long-term growth. For example, we have been adding exposure to the portfolio in housing-related companies with new holdings in Floor and Décor (hard floor retailer) and Pool Corporation (swimming pool maintenance and upgrades). Secondly, the market's current intolerance of expenditure ignores the value of ongoing investments by high-growth businesses. We see the opportunity to be counter-cyclical and have added to existing positions in Amazon (ecommerce and cloud) and Meta (media and advertising). A period of more disciplined growth lies ahead and is not reflected in the valuation of the shares.

- Infrastructure Upgrade - the world's infrastructure needs to be rebuilt and rewired to cope with more people and a changing energy mix. We are open-minded about the range of potential beneficiaries and believe we have added some attractive holdings in this domain with Eaton in power management and Advanced Drainage Systems (ADS) in drainage solutions. By way of example, ADS is the leading manufacturer of plastic piping (70% market share in the US) for wastewater, with uses spanning commercial, residential, infrastructure, and agricultural markets. The core of the opportunity stems from the fact that water infrastructure in the US has seen dramatic underinvestment over recent decades. Plastic is likely to continue to take share from traditional concrete piping reflecting its superior functionality (it does not degrade or crack, limiting contamination and leaks) and the fact that it is easier, safer, quicker, and cheaper to install.

- New Growth Frontiers - if the growth engines of the past decade were the internet, mobile, and software the next decade will be based on the cloud, data and artificial intelligence. These technologies are likely to bridge the digital and physical world, having potentially profound implications for a range of industries. We appear to be early in some of these transformational areas, for example, only 15% of IT workloads are stored in the cloud, but change is likely to be brisk. Indeed, we have seen early signs of the disruptive effect of AI applications on Chegg, the US online education business. We took the decision to sell the shares as we had concerns about falling enrolment numbers and the risk posed by free-to-use applications like ChatGPT to undermine Chegg's subscription model. Semiconductors are the "picks and shovels" underpinning many of these exciting growth trends. We have been looking at companies that operate across the value chain, seeking operators with consolidated markets, high barriers to entry and secular growth. We have therefore purchased positions in Analog Devices (analogue semiconductors), Entegris (cleaning and filtration) and ASM International (atomic layer deposition).

- Supply Side Importance - we are convinced that supply-side factors will be increasingly important in wealth generation. Following a period of abundant financing, low-cost capital operators with cash ready to deploy will be at a premium. Which companies have substantial dry powder to deploy in a world of capital scarcity? Where are the opportunities for consolidation in different industries, and which companies are likely to be the protagonists? We have added to the existing holding in Royalty Pharma which has a portfolio of royalties from existing drugs and specialises in late-stage funding of drug development in exchange for future royalties. This is a differentiated business model and Royalty Pharma's position as a preferred partner has been elevated as rates have increased.

Independent Investment Trust

In early November, the Monks portfolio received £173m of assets following the voluntary liquidation and rollover of The Independent Investment Trust PLC. This comprised around £100m in equity investment holdings and £73m in cash. The stocks inherited were a mix of cyclical companies such as UK housebuilders Persimmon, Redrow, and Bellway and early-stage growth companies like Midwich, a distributor of audiovisual equipment, and Bytes Technology, a software solutions provider. Benefits to shareholders include increased scale, an estimated reduction to the ongoing charges ratio of two basis points, and cash to invest at an advantageous point in the performance cycle. 

Governance and Sustainability

We believe that the building blocks of our investment philosophy - bottom-up stock-level research and long-termism - chime with an increasing focus on stewardship and ESG. We understand that businesses operate in a complex and dynamic world where their activities may have positive and negative impacts. There are no shortcuts. We believe that getting to know companies on a case-by-case basis is essential as we seek to understand their unique circumstances and assess material factors that may influence their sustainability. This directly impacts our assessment of holdings within the Monks portfolio. For example, CRH, a supplier of building materials, is one of the biggest contributors to the portfolio's carbon footprint. In its case, we believe that a strong climate strategy is complementary to its long-term ambitions and can strengthen its competitive advantage. We have had numerous productive discussions with the management and the board, who have been receptive and responsive to feedback. We welcomed the company's new and more ambitious decarbonisation target, which is industry-leading and has been validated by the Science-Based Targets initiative (SBTi). Conversely, we recently sold Ubisoft, the French gaming business, following a misconduct crisis and a deal to allow Tencent to acquire shares at levels that appeared to favour the founders at the expense of minority shareholders.

Outlook

Contrary to consensus, we believe the opportunity set is broadening and the prospects for growth companies are as compelling as ever. The operating environment for companies has undeniably changed. We have reflected on where we may have done better and adjusted the portfolio - we are confident that the companies we own for Monks are well-placed to adapt and thrive. Monks' proposition is clear, namely, to grow savers' capital over the long term. The most certain way to do this is to invest in companies that grow their earnings over long periods - this is the hard currency of returns. We are fortunate to be able to look across the growth spectrum and around the world for ideas. Monks owns an exciting and eclectic portfolio that is well diversified and it deploys modest levels of gearing (5.3% on a net basis) that will enhance long-term returns. We remain unwavering in our commitment to identifying and owning companies where we see the greatest underappreciation of future growth. It is this future growth that will drive the returns of Monks' shareholders long into the future.

Spencer Adair

Malcolm MacColl

19 June 2023

Past performance is not a guide to future performance.

Total return information is sourced from Baillie Gifford/Refinitiv. See disclaimer at the end of this announcement.

For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

The Managers' Core Investment Beliefs

We believe the following features of Monks provide a sustainable basis for adding value for shareholders.

Active Management

- We invest in attractive companies using a 'bottom-up' investment process. Macroeconomic forecasts are of relatively little interest to us.

- High active share* provides the potential for adding value.

- We ignore the structure of the index - for example the location of a company's HQ and therefore its domicile are less relevant to us than where it generates sales and profits.

- Large swathes of the market are unattractive and of no interest to us.

- As index agnostic global investors we can go anywhere and only invest in the best ideas.

- As the portfolio is very different from the index, we expect portfolio returns to vary - sometimes substantially and often for prolonged periods.

Committed Growth Investors

- In the long run, share prices follow fundamentals; growth drives returns.

- We aim to produce a portfolio of stocks with above average growth - this in turn underpins the ability of Monks to add value.

- We have a differentiated approach to growth, focusing on the type of growth that we expect a company to deliver. All holdings fall into one of three growth categories - as set out below.

- The use of these three growth categories ensures a diversity of growth drivers within a disciplined framework.

Long-Term Perspective

- Long-term holdings mean that company fundamentals are given time to drive returns.

- We prefer companies that are managed with a long-term mindset, rather than those that prioritise the management of market expectations.

- We believe our approach helps us focus on what is important during the inevitable periods of underperformance.

- Short-term portfolio results are random.

- As longer-term shareholders we are able to have greater influence on environmental, social and governance matters.

Dedicated Team with Clear Decision-making Process

- Senior and experienced team drawing on the full resources of Baillie Gifford.

- Alignment of interests - the investment team responsible for Monks all own shares in the Company.

Portfolio Construction

- Investments are held in three broad holding sizes - as set out below.

- This allows us to back our judgement in those stocks for which we have greater conviction, and to embrace the asymmetry of returns through 'incubator' positions in higher risk/return stocks.

- 'Asymmetry of returns': some of our smaller positions will struggle and their share prices will fall; those that are successful may rise many fold. The latter should outweigh the former.

Low Cost

- Investors should not be penalised by high management fees.

- Low turnover and trading costs benefit shareholders.

* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this document

Investment Portfolio by Growth Category as at 30 April 2023*

* Excludes net liquid assets.

Portfolio Positioning as at 30 April 2023

Thematic Exposure - Risks and Opportunities

* 'Platform Crush' typically refers to capital light online companies which seek to serve multiple stakeholders via a platform model.

Geographical*

Sectoral*

* Expressed as a percentage of total assets.

†For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

List of Investments at 30 April 2023

* The Schiehallion Fund is managed by Baillie Gifford. The Company's holdings in The Schiehallion Fund are excluded from its assets when calculating the management fee.

See note 3 to the Financial Statements. The ordinary and C share portfolios of The Schiehallion Fund are managed as distinct investment pools, until such time as the C shares are converted into ordinary shares.

U Denotes unlisted (private company) investment.

† Suspended investment.

# For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Figures represent percentage of total assets.

# For a definition of terms used see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

‡ Includes holdings in preference shares, ordinary shares and contingent value rights (CVR).

Baillie Gifford's Approach to Valuing Private Companies

Baillie Gifford holds private company investments at 'fair value' i.e., the price that would be paid in an open-market transaction. Valuations are adjusted both during regular valuation cycles and on an ad hoc basis in response to 'trigger events'. Our valuation process ensures that private companies are valued in both a fair and timely manner.

The valuation process is overseen by a valuations committee at Baillie Gifford which takes advice from an independent third party (S&P Global). The valuations committee is independent from the portfolio managers as well as Baillie Gifford's Private Companies Specialist team, with all voting members being from different operational areas of the firm, and the portfolio managers only receive final valuation notifications once they have been applied.

We revalue the private holdings on a three-month rolling cycle, with one-third of the holdings reassessed each month. The prices are also reviewed twice per year by the Monks Board and are subject to the scrutiny of external auditors in the annual audit process.

Beyond the regular cycle, the valuations committee also monitors the portfolio for certain 'trigger events'. These may include changes in fundamentals, a takeover approach, an intention to carry out an Initial Public Offering 'IPO', company news which is identified by the valuation team or by the portfolio managers, or changes to the valuation of comparable public companies.

The valuations committee also monitors relevant market indices on a weekly basis and updates valuations in a manner consistent with our external valuer's (S&P Global) most recent valuation report where appropriate. When market volatility is particularly pronounced the team undertakes these checks daily. Any ad hoc change to the fair valuation of any holding is implemented swiftly and reflected in the next published net asset value. There is no delay.

The Independent Auditor's Report in the Company's Annual Report and Financial Statements explains the procedures carried out by the external auditor on the private companies (unquoted investments) as part of their audit.

* Data reflecting period 1 May 2022 to 30 April 2023 to align with the Company's reporting period end.

During the year, most revaluations have been decreases given prevailing market conditions. The average movement in both valuation and share price for all private company investments is shown below.

* Data reflecting period 1 May 2022 - 30 April 2023 to align with the Company's reporting period end.

Private company share prices have decreased slightly less than headline valuations, because Monks holds preference stock, which provides some downside protection.

The share price movement reflects a probability-weighted average of the regular valuation that would be realised in an IPO, and the downside protected valuation that would normally be triggered in the event of a corporate sale or liquidation.

* Unlisted security in a listed investment, arising from a private company transaction (Grail).

Income Statement

For the year ended 30 April

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and total comprehensive income for the period.

Balance Sheet

As at 30 April

* See Glossary of Terms and Alternative Performance Measures at the end of this announcement.

The accompanying notes on the following pages are an integral part of the Financial Statements

Statement of Changes in Equity

For the year ended 30 April 2023

For year ended 30 April 2023

* The Capital Reserve balance at 30 April 2023 includes holding gains on investments of £660,579,000 (30 April 2022 - gains of £723,323,000).

The accompanying notes on the following pages are an integral part of the Financial Statements.

Cash Flow Statement

For the year ended 30 April